With the global economy set to recover in the next 12 to 18 months, equities are set to perform well, and particularly in resource-rich countries like Canada, investment officers at BMO Financial Group said on Tuesday.

Discussing his economic and investment outlook in a conference call, Paul Taylor, chief investment officer at BMO Harris Private Banking in Toronto, said that in the current environment, investors should have a meaningful allocation to equities.

“There is a reason for overweight of equities versus the alternatives, which are cash and bonds,” Taylor said. He added that despite the gains achieved since the lows of early March, valuations remain compelling.

Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said he is also bullish on stocks.

“We want to raise our equity positions and hold those positions for at least 12 to 18 months,” he said.

He pointed to a number of promising factors, including economic improvements in Canada and the U.S., and improving momentum in the stock market.

Ablin also noted that 43% of the capitalization of the U.S. stock market is currently sitting in the sidelines in money market funds. Although investors may currently be discouraged by the recent market crash, Ablin expects that as stock market gains set in over the next few quarters, investors will transfer their cash to equities. This will likely help to fuel a market rally in the next couple years, he said.

“As investor attitudes improve,” he said, “that also could help migrate more money into the stock market.”

The investment officers noted that markets in resource-rich countries such as Canada are poised to perform particularly well as the global economy emerges from recession.

“We’re most bullish on Canadian equities,” said Taylor, adding: “we believe that a global economic recovery does mean some firming of commodity prices.”

Taylor said in the current environment, his equity investment strategy is focused on rotating away from stable sectors such as telecommunications, utilities, health care and consumer staples, and towards cyclical sectors such as energy, materials, consumer discretionary and information technology.

In the next 12 months, Taylor expects the S&P/TSX composite index to reach roughly 11,500 points. South of the border, Ablin said he expects growth of roughly 12% for the S&P 500 index in the year to come.

Taylor said he was encouraged to see many companies reporting quarterly results that have beat expectations so far in the current reporting period.

“We’ve seen some good results from a number of players,” he said, adding that continued positive earnings will help to improve investor sentiment.

But the executives also included a note of caution in their outlook, warning that the global economic recovery will be slow. The U.S., in particular, could face several years of hindered growth as the de-leveraging process takes place, according to Taylor.

“There’s no doubt that we’re at a point where it will take quite some time for us to unwind this to return to more normalized levels, in terms of the overall debt load,” he said. “It will be a factor that continues to play out through 2010, 2011 and 2012.”

While the de-leveraging process won’t prevent the U.S. economy from expanding in the next few years, growth will be weaker than it would be during a normal cyclical recovery, Taylor said.

IE